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Germany was dubbed the 'sick man of Europe'
as recently as 2003 but its stunning annualised growth of almost 9% in the
second quarter, confirms it status as the powerhouse of the Eurozone.

German growth slowed following high spending
during the first decade of reunification in the 1990s and at
the height of the property bubble, Irish politician, Mary Harney, reeking of 'nouveau riche' arrogance, turned on
the paymaster of billions in European cash support for Ireland, when she disdainfully spoke of Ireland being closer to Boston than Berlin. In
recent times, as the wheel of fortune has turned, some people have the brass neck to
claim German success is the cause of the woes in countries such as Ireland,
Greece.

Prof.
Hans-Werner Sinn of the Ifo institute, had a book published in 2003: Ist
Deutschland noch zu retten? (Can Germany Be Saved?) - - Its blurb read:
“Taxes keep rising, the pension and health insurance systems are ailing. More
and more companies are going bankrupt or are leaving the country. Unemployment
has reached alarming levels. Germany is outperformed by its neighbours. Its
growth rates are in the cellar, and it can’t keep up with Austria, the
Netherlands, Britain or France. Germany has become the sick man of Europe.“

The SPD-Green government of Gerhard Schröder, who was chancellor in the period 1998-2005, introduced
labour and market reforms and despite
enduring the worst recession since 1945,
Germany achieved a remarkable success in holding unemployment growth very
low from an October 2008 low, through a mix of short-time work, flexible labour
contracts and healthy companies coming into the downturn. Schröder had paid a political price for the reforms but alas, that is the usual downside of political courage.

At the height of the
sovereign debt crisis last May, there was shroud-waving a-plenty and Irish
commentator, David McWilliams, blamed Germany for the economic troubles of
Greece and by extension, the Irish property bubble: "Greece is the
symptom of this crisis, but Germany is the cause...It is only right that Germany
pays for the Greek problem, because Germany is the reason for the crisis."

The admirable Greek prime
minister, George Papandreou, son and grandson of former Greek prime ministers,
who was born in the United Sates where his father Andreas had worked as a
professor of economics and has an American mother, acknowledges that Greece is
primarily responsible for its economic mess.

Media commentator
and Harvard University professor, Niall Ferguson, wrote an article,
The End of the
Euro: How the crisis in Greece could lead to the demise of Europe's most
ambitious project, in a May issue of Newsweek and warned:
"Europe now faces a much bigger decision than whether to bail out Greece. The
real choice is between becoming a fully fledged United States of Europe, or
remaining little more than a modern-day Holy Roman Empire, a gimcrack hodgepodge
of 'variable geometry' that will sooner or later fall apart."

The Finfacts
comment was: "EMU is likely to last much longer than the loss-making
Newsweek, which was put on the auction block this week and Prof. Ferguson will
undoubtedly move on to other beguiling hopeless cases."

Newsweek was sold by
The Washington Post for $1 in early August and the likes of Ferguson will not of
course be deterred from chasing more headlines.

German export data
last Monday showed that most of its trade surplus results from exports outside
the EU and other members of the currency union are gaining from Germany's
rebound.

So Germany is benefitingfrom politically difficult reforms and despite massive public spending since 1991,
GDP per capita in the former East Germany is about 70% of the level in the
former Federal Republic. Convergence within Germany or in the Eurozone, is a
long process.

The misgoverned countries during the boom can only recover through
change and reform.

German GDP expanded by a miraculous 2.2% in the second quarter (+4.1%
yoy), beating all records. The Federal Statistical Office says the stimuli came
mainly from exports and investment activity, but the growth was also driven
partly by household and government consumption.

In addition, it revised up the Q1 figure from 0.2% growth to 0.5%. (The lower
growth rates announced originally fell far short of what our models forecast.
This is the reason we partly discounted our models’ forecast of 2% qoq for Q2.
That has now proved to be unnecessary). The increase in exports comes as little
surprise as the recovery of the global economy probably peaked in the first
half. Most of the capital expenditure was probably in the construction sector,
as considerable investment had to be postponed in Q1 because of the harsh
winter.

Good start into Q3

Confidence indicators such as the ifo Index (up 4.4 points on the previous
month) and the PMI (Purchasing Managers' Index up 2.8 points) made veritable leaps in July and are now only
a hair’s breadth away from past highs. The export industry in particular is
jubilant. Since the start of the year, foreign orders have increased by 3% per
month on average. In June the value of German goods exports fell short of the
June 2008 record by only 1.7%. This suggests that GDP will probably expand at
around ¾% qoq in the third quarter, again outstripping trend growth.

GDP forecast for 2010 boosted to 3 ½%

Right at the start of 2010, Deutsche Bank was already among the first
forecasters to look for 2% expansion in Germany in light of the increasing signs
of a dynamic global recovery. Considering the excellent report for H1 the
year-on-year performance at mid-year is now nearly 1 ½ pp higher than assumed to
date. This has led us to raise our forecast for full-year growth - - on an
unchanged trend forecast for H2 – to 3 ½%. This is a really breath-taking
number, but it has to be viewed in connection with the year-earlier slump, which
the Federal Statistical Office also revised up from -4.9% originally to -4.7%
now.

Caution is advised for 2011

H1 growth was very heavily driven by exports, and we know from past
experience that domestic investment is closely correlated with export trade. So
this makes it worth taking a closer look at the current export performance.

The current development of demand for exports can
- - at least theoretically - -
be broken down into three components:

The international inventory cycle

Catch-up effects from investment postponed in 2009

The underlying cyclical development in major customer markets

The first two components are, by definition, temporary in nature, and their
impact is likely to ease substantially by the second half of the year. But the
cyclical growth in key export markets indicates that the export growth rates
will soon shrink significantly. Not only the temporary effects mentioned above
but also the easing effects of monetary and above all fiscal policy measures
play a major role in the process. This is highlighted by the current PMI trend
in the two economies that were the main drivers of the global recovery over the
past few quarters. In the US, the PMI has lost nearly 5 points since April. Poor
labour-market readings have induced the Fed and our hitherto bullish US
colleagues to revise down their growth expectations for the second half. In
China, the PMI started to decline back at the start of the year, and in fact the
index slipped in June below the boom/bust level of 50, to 49.4. The degree of
importance for German exporters of these countries’ industrial growth, as
reflected by the PMIs, can be seen in the following chart. German export growth
(yoy) shows a correlation of 0.8 – with a time lag of four months – with the PMI
readings in China and the US (weighting by export shares, with China as a proxy
for Asia as a whole). This time lag is clearly visible in the German export
slump in autumn 2008 and the subsequent recovery in spring 2009.

Exports set to weaken in H2 2010 and in 2011

Regardless of the current euphoria, the chart sends a clear message: during
the second half of the year export momentum is poised to ease substantially,
especially since the PMIs of major European trading partners such as France and
the United Kingdom have been trending south for several months and the growth
implications of the fiscal consolidation measures in various European countries
still lie ahead.

GDP growth: Cautious forecast for 2011 is warranted

The surprisingly good growth performance in the second quarter, which will
probably spill over to Q3, means that GDP expansion is likely to accelerate to 3
½% for 2010 as a whole. Given the temporary effects and the cyclical downturn in
key export markets, the 12% export growth of 2010 is poised to slow to about 6%.
For this reason, we are sticking with our cautious forecast of 1 ½% GDP growth
in 2011. Nonetheless, this means that the blow to GDP sustained in 2009 will
probably be cancelled out by the performance in the coming year.